Superb Turnaround
DIRTT Environmental earns $2.2-million in Q2 2023
2023-08-02 19:10 ET - News Release
Mr. Benjamin Urban reports
DIRTT REPORTS SECOND QUARTER 2023 FINANCIAL RESULTS
DIRTT Environmental Solutions Ltd. today released its financial results for the three and six months ended June 30, 2023. All financial information in this news release is presented in United States dollars, unless otherwise stated.
Second quarter 2023 highlights
- Revenue of $44.8-million, up 22 per cent from the first quarter and flat compared with prior-year period;
- Gross profit margin improvement of 1,849 bps (basis points) from prior-year period;
- Achieved adjusted EBITDA( earnings before interest, taxes, depreciation and amortization) of $1.9-million (4.1 per cent of revenue), up $11.3-million from prior-year period;
- Liquidity of $28.1-million at June 30, 2023, compared with $16.1-million at Dec. 31, 2022;
- On May 9, 2023, DIRTT entered into assignment and co-ownership agreements with Armstrong World Industries Inc. (AWI) resulting in cash inflow of $10.0-million and a gain on sale of patents and software of $6.1-million;
- Fareeha Khan, vice-president of finance, has been appointed CFO (chief financial officer) effective Aug. 25, 2023.
Management commentary
Benjamin Urban, chief executive officer, remarked: "The excitement and energy at DIRTT is as high as it has been in a long time. The improved financial performance, stabilizing balance sheet and expanding partner network all give us confidence in the future of DIRTT. I am proud of the way our team has responded to the economic uncertainty experienced during early 2023 and encouraged by the increase in order pace, which began in April and has continued into the third quarter".
Bradley Little, chief financial officer, added: "The pricing, cost reduction and cash initiatives implemented over the past year have bolstered our liquidity and provided a solid platform from which to drive profitable growth for the future and also to navigate market uncertainty.
We have made up considerable ground following a slower than expected start to 2023."
DIRTT also announced the appointment of Fareeha Khan, vice-president of finance, to the position of chief financial officer, succeeding Mr. Little who is departing the company. Mr. Little's last day at DIRTT will be Friday, Aug. 25, 2023, and Ms. Khan will formally assume the duties of CFO on Monday, Aug. 28, 2023.
"We extend our heartfelt gratitude to Brad for his contributions to DIRTT during his tenure as CFO," said Mr. Urban. "While we are sad to see him go, we fully support Brad's decision to be closer to his family and wish him well."
In addressing the appointment of Ms. Khan, Mr. Urban added: "We are excited to have Fareeha as our new chief financial officer. Her exceptional understanding of our financial landscape and deep knowledge of our business and strategy make her an exceptional fit. We have full confidence in Fareeha's ability to build upon the strong financial foundation that Brad helped us establish."
Ms. Khan has over 20 years of finance experience. Ms. Khan completed her chartered accountancy with Deloitte LLP and obtained her bachelor's in accounting science at the University of South Africa. After completing her studies, Ms. Khan worked at Deloitte LLP and PricewaterhouseCoopers LLP in multiple countries until she joined DIRTT in 2019. Ms. Khan is a member of the Institute of Chartered Accountants in England & Wales and the Institute of Chartered Accountants in Zimbabwe.
Second quarter 2023 results
Second quarter 2023 revenues were $44.8-million, an increase of 0.1 per cent from the second quarter of 2022 and an increase of $8.0-million, or 22 per cent from the first quarter of 2023. The modest year-over-year increase was driven by improved pricing and product mix, offset by a decrease in total order volume. Compared with the first quarter of 2023, second quarter activity is higher, in line with seasonal demand patterns and timing of project schedules.
Second quarter 2023 gross profit and gross profit margin were $14.6-million and 32.5 per cent respectively, an increase of $8.3-million, or 132 per cent, from $6.3-million and 14.0 per cent, for the second quarter of 2022. The increase in gross profit margin was a result of realization of the company's price increases, better product mix, improved labour efficiency and better fixed cost leverage.
Second quarter 2023 adjusted gross profit and adjusted gross profit margin were $16.2-million and 36.2 per cent, respectively, or an increase of $7.7-million and 91 per cent compared with the prior year's second quarter.
Sales and marketing expenses decreased by $1.2-million to $6.6-million for the quarter ended June 30, 2023, from $7.8-million for the quarter ended June 30, 2022. The decreases were largely related to a realignment of back office support, territory coverage and cost structure with current demand levels. The company expects to increase the investment in this function during 2023 in order to support organic revenue growth.
General and administrative expenses decreased by $1.4-million to $5.5-million for the quarter ended June 30, 2023, from $6.9-million for the quarter ended June 30, 2022. The decrease was primarily related to a decrease in professional services of $1.3-million, which included $300,000 related to the costs of the contested director elections.
Operations support expenses decreased by $700,000 from $2.5-million for the quarter ended June 30, 2022, to $1.8-million for the quarter ended June 30, 2023. The decrease was primarily due to a $600,000 decrease in salaries and benefits costs associated with the planned headcount reductions as part of the company's cost savings initiatives.
Technology and development expenses decreased by $600,000 to $1.3-million for the quarter ended June 30, 2023, compared with $1.9-million for the quarter ended June 30, 2022, primarily related to decreased salaries and benefits costs associated with the planned headcount reductions as part of the company's cost savings initiatives.
During the quarter, the company incurred $1.5-million in reorganization costs which relate primarily to termination costs associated with actions taken to streamline the company's back office and operational support functions.
On May 9, 2023, the company entered into agreements with AWI for the partial assignment to AWI and co-ownership of a 50-per-cent interest in the rights, title and interest in certain intellectual property rights in a portion of the ICE Software that is used by AWI, as well as the knowledge transfer relating to certain source code of the ICE Software, for cash consideration. The company also entered an agreement for the prepayment of certain development services. Cash proceeds of $10.9-million were received during the quarter and profit of $6.1-million recognized on this transaction. Further details on this transaction can be found in the company's Form 10-Q filed with the SEC and applicable securities commissions or similar regulatory authorities in Canada on Aug. 2, 2023.
Net income and net income margin for the quarter was $2.2-million and 4.9 per cent compared with $(19.3)-million and (43.1) per cent for prior year's second quarter, respectively. The increased net income is primarily the result of the higher gross profit margin and reduced operating expenses explained herein as well as the profit from the AWI transaction.
Adjusted EBITDA and adjusted EBITDA margin for the quarter was a $1.9-million and 4.1 per cent, respectively, an improvement of $11.3-million from a $(9.4)-million and (21.1) per cent for the prior year's second quarter. Improvements in adjusted EBITDA for the quarter were due to the noted reasons.
Outlook
Through the first six months of 2023 the company has seen continued volatility in economic conditions, especially in regions with concentrated sales to the technology and banking sectors. These conditions included layoffs in the technology sector, reduction in short-term needs for office space, and increasing interest rates impacting borrowings resulting in certain larger projects that were planned for the first two quarters of 2023 being deferred or cancelled.
In response, the company identified and took action to reduce annualized overhead costs by $5.0-million during the first quarter of 2023. Further, on May 8, 2023, the company reduced its salaried work force, resulting in annualized savings of $2.6-million. One-time costs associated with these reductions, incurred in the second quarter of 2023, were approximately $700,000.
In some aspects, the macroeconomic uncertainty has subsided. Various inflation metrics have improved over the three months ended June 30, 2023, and certain recession indicators have eased. The company has seen improved demand for its products, beginning in mid-April. From May 1 to June 30, 2023, the company generated $33.3-million in total revenue and an associated $3.5-million in adjusted EBITDA, with adjusted gross profit during the same period of 39.2 per cent. Further, the company has been awarded several large projects during the second quarter of 2023, including Bechtel and Visa, which began to order during the second quarter of 2023, with Apache expected to order during the second half of 2023. These projects are expected to deliver an aggregate of $10-million to $15-million in revenue during 2023.
Total revenue for the second quarter of 2023 increased by approximately $8.0-million, or 22 per cent from the first quarter of 2023. The company expects a sequential increase in revenue in the third quarter of 2023 over the second quarter of 2023, though not to the same extent.
For 2023, the company continues